The limits of divestment activism

For many protest movements, withdrawing financial support for industries and countries that they deem to be unethical is both a moral obligation and a means to enact change. In the 1980s activists called on investors to relinquish ties with South Africa over apartheid. Since the 2010s, as climate change awareness grew, fossil fuel investments have come under fire. And over recent months students across the world have demanded that university endowments cut links to Israel over its military conduct in Gaza.

Their rationale is simple: if enough investors move their money out, then the unethical actors’ power will wither. But such campaigns have a mixed record. Many achieve some divestment, but are less successful in bringing about actual social and economic change. In some cases they can even risk undermining their cause.

Today, considerable institutional and retail capital is deployed via trillion-dollar fund managers, often in passive strategies, to companies with international supply chains and clientele. Trying to channel broad principles of justice through such a global and complex system has its limits.

First, there are practical hurdles. Divesting direct stakes in, say, polluting thermal coal companies is straightforward enough, if there is willingness. But if an institution invests in an index fund that tracks the MSCI World or S&P 500 indices, as is common, then it would have to redeem its entire investment to eliminate exposures. Investments via private equity and hedge funds are even harder to unravel.

Defining the extent of a campaign is also a challenge, particularly when the target is an entire country. There are complex economic, political and cultural linkages to disentangle, with no obvious lines in the sand. Student protesters in America recently called on their universities to divest from companies with business ties to Israel, which includes the likes of Amazon, Google and Microsoft. Removing these global titans from portfolios would leave little upside. Ultimately, fund managers have a responsibility to manage risk and returns for clients, which limits their room for manoeuvre. After all, university endowments need to ensure they can fund future generations of upstanding students, too.

Unintended consequences are another problem. Selling an asset requires a buyer. There are plenty of less socially conscious acquirers willing to hold an investment — particularly if it comes at a discount. Dropping holdings also means investors lose the right to influence change as shareholders. A recent study by the European Corporate Governance Institute found that retaining the stocks of businesses that have made corrective actions, for example to reduce pollution, can encourage them to make further positive changes.

Targets also rarely fit neatly into “good” and “bad” buckets. Last month, the Hay Festival and Edinburgh International Book Festival dropped fund manager Baillie Gifford as sponsor, partly given its exposure to the oil sector. The investment group has, however, taken significant bets on companies that support the green transition, and invests far less in fossil fuel-related companies than many rivals.

Calls for divestment still play a role in fighting injustices and shining a light on investor portfolios. They have been most effective as part of wider co-ordinated efforts, including sanctions and the withdrawal of other financing sources. There is also a place for proactive principles-based investment strategies and “separately managed accounts”, which allow investors to customise their portfolios better. More granular data on funds’ investments and improved transparency would help inform investors about the precise destination of their money.

But however satisfying it may be for activists to celebrate a forced sale or a falling share price, the intricacies of the investment world should serve as a reminder that change can rarely be achieved by righteousness alone.

Letter in response to this article:

Critique of book festival protests missed the point / From Barbara Mullarney, London W3, UK